Tuesday, 22 January 2013

More Power to Economists!

With
sound economic policy out of favour, there may be an argument for giving
economists more control in government.

Good economics is a hard sell. Economists have tried their hardest to
convince people that relative free movement of goods will benefit the economy
as a whole but businesses battling against imports from overseas win out
against typically tepid support for free trade.
The United States and Britain are cutting back on immigration and
restricting the entry of even highly-skilled workers despite such individuals
paying significantly more in taxes than they receive in government
payouts. Considering that some areas of
government such as monetary policy have already been handed over to economists,
is there an argument for more policy to be handled over to such unelected
experts?

The independence of central banks in
monetary policy is sacrosanct in many countries. Politicians who already determine fiscal
policy (government spending and taxation) are seen as being too unreliable to
also have the power over the tools of monetary policy such as the ability to
set interest rates. For example, a
government may be tempted to lower interest rates in the period before an
election which would boost the economy as well as their chances of staying in
power. Politicians have instead handed over
the control of monetary policy to their country’s central bank whose officials
are seem as better at long-term economic policy due to not having to worry
about reelection. But politicians still
get to stipulate the goals of monetary policy such as low inflation (or full
employment in the case of the Federal Reserve in the United States).

The handing over of monetary policy has
been made possible by worries about the adverse effects of inflation. Rising prices eat away at the value of
savings and households and businesses may hold back on spending if prices jump
around a lot. The relative level of
consensus over the need to rein in inflation has made monetary policy less
controversial and enabled its outsourcing to central banks. In comparison, fiscal policy involves more
numerous components such as the level of taxation and spending along with what
should be taxed and where money should be spent. As such, there will always be winners and
losers in fiscal policy as, for example, spending by the government will benefit
some and exclude others depending on what is targeted. To ensure that the majority of people are
happy with the way in which the government goes about its business, politician parties
have to outline their spending and taxation plans to voters in a democracy in
order to get elected.

However, democracy does not mean that
voters will choose the party with the best economic policies to govern with
other issues also swaying the minds of voters.
There is a theory which espouses that voters have biases in the ways in
which they vote such as a dislike of foreigners which leads to parties
attracting voters with policies with lower trade and less immigration than
would be optimal for the economy. Other
examples of biases could include an anti-tax bias where people dislike being
taxed and a jobs bias where the number of jobs is seen as more important than the amount of overall production .
Yet, it would require a considerable investment for voters to acquire
the knowledge to decipher which policy options would be best so it is easier to
fall back on their inherent biases.

The debt crisis in Europe has thrown up one
example of a country giving up on politicians and handing over the government
to an economist – Italy. Mario Monti was
appointed as the head of a government of technocrats in November 2011 after
years of mismanagement had left Italy as the most indebted country in Europe
and in threat of economic collapse amid the turmoil in Europe. Italians initially welcomed Monti but his
popularity faded quickly as the austerity policies his government introduced
proved too much for Italians to bear.
Now, in a bizarre twist of fate, Italians have a choice in elections at
the end of February between parties headed by Monti and Silvio Berlusconi who
was the previous Prime Minister before he lost his majority in parliament and
who is responsible for many of Italy’s problems (more background on
Berlusconi’s follies at Bigger than Berlusconi).

However, economists are not always
prescribing austerity. The IMF
which is an international body stacked full of economists made a case for austerity
measures in Europe to be eased if growth continues to remain weak (for a further explanation, refer to Time for Plan B?). On the other hand, Angela Merkel, the German
Chancellor, has been the toughest advocate for spending cuts in Europe as German
taxpayers are unwilling to bail out the spendthrift countries in Europe. Germany’s voters distrust of their fellow Europeans has resulted in the Eurozone crisis dragging on for much longer than it needed
to (see Conspiracy Theory for your Greek Holiday for more) which has also been painful for the Germans
themselves. But Europe would have not
gotten into this mess in the first place if government spending had been kept
in check during the boom times preceding the crisis. Your Neighbourhood Economist would not be as
bold (or stupid) to argue that economists are without fault in the Eurozone
crisis but having economists overseeing government spending levels could have helped
stop government finances following the boom and bust of the economy. The current debt crises in Europe and the United States may not be enough to facilitate such a role for economists but that does not mean it is not an idea worth considering.